Question

Pop Corporation owns 75 percent of the voting common stock of Son Corporation, acquired at book value during 2016. Selected information from the accounts of Pop and Son for 2017 are as follows:

                                                                                    Pop                  Son

                        Sales                                                    $1,800             $1,000

                        Cost of sales                                             980                   380

During 2017, Pop sold merchandise to Son for $100, at a gross profit to Pop of $40. Half of this merchandise remained in Son’s inventory at December 31, 2017. Son’s December 31, 2016 inventory included unrealized profit of $8 on goods acquired from Pop. All of Son’s inventory that had this unrealized profit of $8 @ December 31, 2016 was sold to outside customers at a large profit during 2017.

Required:

1. Please write out the journal entries to eliminate the effects of intercompany transactions between Pop and Son for 2017.

Answer 1

Particulars	Debit	Credit	Remarks
Sales	$ 50		(Reduction in sale made by parent)
Cost of Sales		$ 30	(Reduction in Cost of sale correspondingly)
Inventory		$ 20	(Elimination of Gross profit by reduction of carrying value of Inventory)
(Elimination entry for Inventory in stock)
Sales	$ 50
Cost of Sales		$ 50
(Elimination entry for Inventory sold during year.)
Retained Profits (Opening)	$   8
Cost of Goods Sold (Opening)		$     8	(Reduction in opening inventory cost to record unrealised profit.)
(To record unrealised profit in opening inventory)

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